For the week ending 1 September 2017

US nonfarm payrolls disappoint

Harvey displaces thousands, energy sector hit hard

North Korea fires missile over Japan

US Q2 growth revised higher

Euro strengthens as inflation rises

Gains later in the week helped stocks move higher amid generally light trading in advance of the Labor Day holiday. The advance brought the large-cap indexes and the technology-heavy Nasdaq Composite near their all-time highs, but the smaller-cap indexes remained a few percentage points below the peaks they established earlier in the summer. Technology stocks performed well, helped by strong performance at midweek from dominant Internet firms Facebook, Amazon, Netflix, and Google. Health care shares were also strong, boosted by the announcement of biotechnology giant Gilead Science’s planned acquisition of rival Kite Pharma. US 10-year Treasury note yields fell six basis points to 2.14% on the week while West Texas Intermediate crude oil dipped 80 cents a barrel to $46.75. After spiking higher on Tuesday, volatility, as measured by the Chicago Board Options Exchange Volatility Index (VIX), ended the week lower, at 10.3 from 11.9 a week ago.

MACRO NEWS

US hiring managers went fishing in August

History shows that August is traditionally one of the slowest months of the year for new hires, and this August was no exception. US nonfarm payrolls rose a less-than-expected 156,000, missing estimates for a 180,000 rise. The unemployment rate ticked up to 4.4% from July’s 4.3%. Payrolls for the prior two months were revised lower by a combined 41,000. On a brighter note, the August Institute for Supply Management manufacturing index reached a six-year high of 58.8, up from 56.3 in July. Manufacturing data across the developed world were on the firm side, suggesting the synchronized global economic upturn remains intact.

Gasoline prices rise as Houston begins recovery

An estimated 23% of US refinery capacity is offline because of flooding in the wake of the exceptionally slow-moving Hurricane Harvey. Nationally, gasoline prices have risen an average of 17 cents a gallon since Harvey made landfall and now average $2.45, according to AAA. The storm, which left at least 39 dead and displaced tens of thousands, is expected to be one of the most expensive natural disasters in US history. Parts of the Houston area received in excess of 50 inches of rain, a US record for a single event. Markets have largely taken the news in stride. Prices of municipal securities issued around the Houston region have not been heavily impacted, nor have bonds of companies in the insurance and energy industries.

Euro Strengthens as Inflation Rises

Euro strength continued to be the topic du jour as this strength began to frustrate those looking for an earnings revival in Europe. Cuts to profit estimates have outnumbered upgrades for nine straight weeks, trailing global momentum by the most since 2014, according to Citigroup research. Inflation in the eurozone ticked up at a higher rate than expected (climbing to 1.5% from 1.3% in July), helped by energy prices, according to a European Union statistics agency report. The region’s inflation is below the European Central Bank’s target of “below, but close to 2%,” and core inflation (less volatile food and energy prices) was flat at 1.2%. Notably, German and Spanish consumer prices rose more than expected in August.

North Korea ups the ante

North Korea conducted several missile tests this week in response to annual US-South Korea military exercises. The second launch drew particular scrutiny as the missile crossed over Hokkaido, Japan’s northern island. US and South Korean aircraft replied by conducting tests of bunker busting bombs on a range near the North Korean border. Equity markets briefly sold off on risk aversion at midweek before recovering losses. US 10-year Treasury note yields dipped briefly to 2.08% while safe-haven currencies like the Japanese yen and the Swiss franc also rallied.

US growth revised up

The US economy grew at a 3% annual pace in the second quarter, an upward revision from the 2.6% pace reported in July. Spending was robust by both consumers and businesses in Q2, with capital expenditures expanding at an 8.8% rate — the fastest in nearly two years. Corporate profits rose 8.1% year over year.

Trump stumps for tax reform

US President Donald Trump travelled to Missouri this week to make the case for overhauling the US tax code. The president called this a once-in-a-generation opportunity to reshape the increasingly complex US tax system. But, the president offered few specific policy proposals beyond calling for a code that is fairer for lower- and middle-class Americans and for the corporate tax rate to be lowered to 15%, a level he said would create jobs and raise wages. Tax reform faces an uphill battle, with an already packed legislative calendar set to become even more crowded as lawmakers begin to address disaster relief for the Texas Gulf Coast.

High-tax Denmark looks to cut rates

Denmark is proposing the equivalent of $3.7 billion in income tax cuts as an incentive for citizens to work and to save for retirement, according to the country’s finance minister, Kristian Jensen. In 2016, tax revenues in Denmark were the highest in the developed world at nearly 47% of gross domestic product, according to the Organization for Economic Cooperation and Development (OECD). Tax revenue as a percentage of GDP in the 35-member OECD averaged 34.3%, while Americans paid an average of 26.4%.

Brexit talks grow acrimonious

The third and latest round of Brexit negotiations ended on an acrimonious note, with the two sides unable even to agree on whether any progress had been made during the week. British Brexit secretary David Davis said concrete progress had been made while the European Union’s Michel Barnier said no progress had been made. There has been no agreement on key issues such as the Northern Ireland border, citizen’s rights and the size of the Brexit divorce payment. The EU has stated that sufficient progress must be made on those issues before discussion of the United Kingdom’s future trade relationship with the EU can be taken up.